What the Trump tax cuts got wrong

The tax cuts President Trump signed at the end of 2017 are already boosting corporate profits, and they’ll probably enhance economic growth for at least a year or two. But could they be doing more?

Jason Furman thinks so. “We missed the opportunity to do the type of tax reform we should have done last year,” Furman, a professor at Harvard’s Kennedy School who chaired the Council of Economic Advisers for President Obama, tells Yahoo Finance in the video above. “We made a mistake.”

Furman agrees that corporate tax rates were too high, and Obama himself favored lowering the top corporate rate from 35% to 28%. But Furman would have left rates higher than the 21% corporate rate Trump signed into law while offering stronger incentives for business investment than the Trump bill contains.

Trump tax cuts allow businesses to claim exemptions for certain investments as soon as they make them, which Furman supports. But the Trump provision expires after five years. “I would make that permanent,” Furman says. “And I would make it broader for more types of investments than were in this law.”

That would retain the incentive for businesses to invest more, a main goal of the Trump cuts. But it would also allow for a rate higher than 21%, which would bring in more tax revenue and require less federal borrowing to fund the tax cuts. As is, the Trump tax cuts are likely to add $1.8 trillion to the national debt during the next decade. Some economists worry that added borrowing—with federal deficits probably topping $1 trillion a year by 2020—will crowd out private investment and slow economic growth rather than stimulate it.

Furman agrees with many economists who think the tax cuts will add to growth this year and maybe next. “We’re going to certainly get a fiscal stimulus this year, and it’s about $200 billion,” Furman says. “What the economy needs, though, is not short-run help. We need more growth over the medium and long run.”

Phase 2 tax cuts

Tax reform isn’t necessarily over. Republicans are talking about “Phase 2” tax cuts they might pass later this year to address another flaw in the Trump tax law: Cuts for businesses are permanent, while cuts for individuals are temporary. That’s one likely reason the tax cuts are unpopular, and Republicans would like to fix that.

Democrats, meanwhile, think they could retake the House in the November midterm elections and perhaps even the Senate. If that happens, they might try to pass legislation rolling back some of the Trump tax cuts to pay for infrastructure or other Democratic priorities. Needless to say, Trump wouldn’t go along with that. But there will come a time when he’s no longer calling the shots.